During the past seven years, we’ve endured the worst U.S. economic recovery in the known history of recoveries. This is a plain and indisputable fact by the measurements of all economic recoveries. The worst ever.
Did this have something to do with President Barack Obama’s policies? Of course it did. It was no coincidence that the wild expansion of government in both spending and regulation put a damper on business growth and therefore economic growth. That’s a direct causal effect.
This spending and regulatory binge also played a role in income stagnation and, yes, in one of today’s favorite bogeymen: income inequality. The case for this is fairly straightforward to show, but you will be hard-pressed to find it in the mainstream media.
First, let’s be crystal clear that the American economy really has been sick since 2009. From 2010-2016 we had the objectively worst economic expansion in history, which is strange because typically, a deep recession such as the one we had starting in 2008 is followed by an equally powerful expansion. There’s a strong relationship between depth of decline and height of recovery.
Until this time.
President Obama was the first president without a single year of 3 percent real GDP growth while in office. Ever. GDP (Gross Domestic Product) is the only real measurement of the overall growth of the economy. But wait, there’s more. Annual economic growth during 2010-2016 was a full point less than overall growth from 1965-2010. So even including all of the recessions in those decades — including Jimmy Carter’s malaise, the dotcom bust and all the rest — that 45-year period still beat the Obama recovery years. By a long shot.
During the same 2010-2016 period, growth in real personal income and wages also dragged well below the historic average. Income inequality increased during this time. But both of these have been a long-term trend that just ratcheted up during the Obama years.
Weak economies overall drive income inequality because it’s people at the lower ends that are hurt the most. But there are multiple other reasons.
Why was the recovery so bad?
Let’s step back for a second.
There are three factors driving an economy: labor force growth, capital growth and productivity. All three happen during a strong economy. The labor market expanded rapidly during this crummy recovery, so that was not a problem factor. But capital formation — money to invest in startups, expansions, machinery, innovation — grew at half the historical rate and productivity grew at only about one-third of the normal rate.
Capital. Without access to money for investment, there was less innovation, less growth and expansion and fewer new businesses. So existing businesses were somewhat stagnant, and they faced less competition that would have bred innovation to compete. Without that, new markets and industries were not explored and the economy hobbled through a recovery that barely stayed out of recession at several points.
Capital was dramatically restricted through aggressive government laws designed to avoid the kind of subprime real estate bubble and bust in 2007 that led to a near-financial collapse and the recession. The primary law was Dodd-Frank, which mandated higher capital levels for all banks — including community banks, which were not a driver of the subprime crisis.
Further, the law added so many layers of regulations to an already heavily-regulated industry that compliance costs for banks have doubled since Dodd-Frank went into effect. Compliance costs alone are now figured at $70 billion annually — or nearly one-quarter of a bank’s total expenses — according to Federal Financial Analytics.
Banks need a level of regulation. But too much regulation stifles their ability to lend.
And without going into too much detail, the Federal Reserve Board’s money supply policies included loaning money to banks at such a low rate (essentially, 0 percent interest) that banks could invest in guaranteed financial instruments, such as U.S. Treasuries, and make guaranteed money with zero risk. Profits at zero risk are hard to pass up and that policy by the Fed kept billions of dollars out of the hands of business.
The truth is that businesses being able to access money from banks and investors is critical to a strong economy.
Productivity. Productivity can be measured a few different ways. The Bureau of Labor Statistics, however, puts it as: “Productivity is measured by comparing the amount of goods and services produced with the inputs which were used in production. Labor productivity is the ratio of the output of goods and services to the labor hours devoted to the production of that output.”
During strong economic growth, productivity increases. However, with fewer businesses and the associated lack of innovation and expansion, there were fewer options to be promoted, all of which kept productivity lower. More people wanted jobs, but the jobs they were getting were the same type and level as before, which meant their productivity was about the same.
This, of course, also leads to income stagnation specifically for the lower and working middle class.
More economy-wrecking government
Dodd-Frank deeply restricted businesses’ ability to get investment capital. But it was not alone in throwing anchors around the neck of economic growth.
A second major anchor was the Affordable Care Act, a.k.a. Obamacare, which turned out to be neither affordable nor about care. Obamacare added an enormous mandate on businesses to provide an increasingly expensive benefit, and it did so with mountains of paperwork detailing what all must be provided. Even small businesses with 50 employees frequently had to add a full-time position just to understand and comply with this law.
Obamacare’s onerous costs came at precisely the same time that Dodd-Frank and the Fed were making businesses’ access to capital almost impossible — a conflagration of government intrusions.
As the government adds more requirements on employers to offer benefits and comply with regulations, employers have less money left for actual wages. Obamacare was a double-whammy in that it required the extra costs but then also screwed up an already malfunctioning marketplace and prices soared even faster.
And of course the Obama administration was renowned for adding an enormous number of executive branch regulations through the EPA and other administrations. With this understanding, it’s a tribute to the capitalistic drive of Americans that the nation could mount any sort of economic growth at all.
Illegal immigration is a real growth roadblock
This is not hard to understand, just hard for multiculturalists to understand.
Millions of uneducated, unskilled people from Mexico, Honduras, Guatemala, El Salvador, etc. who do not speak English not only take low-end jobs from Americans, but they also depress the wages at the bottom because ridiculously low hourly rates by American standards are still better than anything they can make in their dysfunctional third-world home countries. Obviously, that’s why they came here.
In the past 30 years, the United States has absorbed 40 million foreign-born adults and another 20 million adult children of immigrants — legal and illegal — giving the U.S. an endless stream of low-wage labor. With that massive pool at the bottom, there will be no increase of wages for the foreseeable future. Economics.
Professor George J. Borjas, a highly respected economist at Harvard’s Kennedy School of Government and maybe the world’s foremost expert on the economics of immigration, has found that: “If immigration increases the size of a group by 10 percent, the earnings of native workers in that group fall by 3-4 percent.”
Interestingly, this conceptually works at the top just as it does at the bottom.
So consider this and laugh bitterly if you like: if you really want to close income inequality gap, our immigration policy should be the precise opposite of what it is. We should greatly increase the legal immigration of doctors, lawyers, engineers, MBAs, mathematicians and all but stop immigration at the bottom end. That would drive up incomes at the lower levels for lack of competition — including for newly arrived workers — but it would create wage stagnation at the top end by bringing in competition, and the income gap would close.
Of course, it will never happen. Consider who makes up Congress. Mostly lawyers and some doctors and MBAs who all have children pursuing similar high-end careers. And we have those vested in large-scale immigration in many industries and the Democratic Party. Not going to change.
Minimum wage laws just make it all worse
The solution to the problems offered by big-government progressives is — more government intervention.
The problem is they do not honestly assess the underlying foundational problems, but just see a symptom they perceive as a problem and go after that symptom in a vacuum. The causes listed above are the drivers of low-end wage stagnation. But rather than ratchet back those drivers, they pile another government solution on top of the government-caused problems — one that is already proven to make the problem yet worse.
It’s almost like there is a formula at work.
Nonetheless, the solution now being promulgated is to raise the minimum wage to $15 per hour. #Fightfor15 is the hashtag and rallying cry festooning the protest signs by people wholly unaware that the market might get the wages there if the immigration policy flipped and less money was required on failing benefits programs.
The obvious results of setting the minimum wage where central planners think it ought to be, and not where the market says it is, is that businesses will find ways around it. Legal ways. They will be forced to.
The first option: Automation. Where robotics and self-serve kiosks were too expensive at $8 per hour per worker, they no longer are at $15 per hour. They have now become less expensive than many workers. So companies invest in those, which results in minimum wage workers, and even those above that, being out of work completely. Workers lose jobs. $0 per hour.
The second option: Move. Companies pick up and move operations to a jurisdiction that does not have artificially high wages so they can compete effectively. Workers lose jobs. $0 per hour.
The third option: Downsize. Companies either retrench at a smaller size or go out of business. Workers lose jobs. $0 per hour.
And guess what? This is exactly what has been happening in the uber-progressive city of Seattle, which has adopted the $15-per-hour minimum wage.
The city commissioned a study by economists at the University of Washington and published by the National Bureau of Economic Research. Those study results stunned progressives, but really just found basic economics and common sense at work: Low-wage workers’ incomes actually dropped, substantially, falling an average of $125 per month.
And this was only at a $13 hourly minimum wage, as the Seattle law ramped it up to $15 over a few years. If they allow it to continue, which the marching placard people want, it will continue to worsen the situation for the lowest end workers in Seattle through automation, movement and downsizing.
And the other component that will get worse is the income inequality bogeyman. Anyone want to guess how big government progressives will want to fix that?
Rod Thomson is a former journalist, author and is Founder of The Revolutionary Act.